In value-investment, you must be able to list downs the attractive features of a company that you're investing in. If your text can't cover for (at least) half page of a paper, it's probably that you're not quite understand this company, and this investment can't be considered a secure one.
So, I decided to list down all the reasons for every company that I buy.
I start with AirAsia, because this is my latest investment. I'm still quite excited that I found this company for investment.
I invest in AirAsia, because it's a great company, due to the following reasons:-
- Simple business model that I can understand.
- A growing company in a growing industry.
- Great management – Tony Fernandes
- High profitability – It has a high profit margin compared to the other LCCs.
- Leader in the industry – Best Low-cost Airline Award (rank no.1 in Asia region), year 2007 .
- Strong Brand Name - high value of intangible asset.
But, no matter how good is a company, it's not a good investment if the price is high. I have to make sure that I'm not paying too much for it. Here's my own analysis based on its 3Q-2007 report:
- AirAsia's stock price is around RM1.80 today. 9-month profit for FYE2007 is about RM0.13 per share. this means its PER for 2007 is about 10 to 12.
- its 9-month revenue grow 53%, and the 9-month profit before tax grow 190% as compare to 2006.
- based on its growth in fleet size from 50 aircrafts (this year) to about 150 (year 2013), my estimation for its average growing rate in the next five years is about 25% per annum.
- The ratio of PE to its growth rate is less than 0.5, so the price may be considered cheap. (This is an analysis technic suggested by Peter Lynch).
- its net asset per share is just 64sen. This is less comfortable for a secure investment. But AirAsia has a great value of intangible asset - its brand name.
As a conclusion, I'll continue to accumulate AirAsia stock as long as its price is still below RM2.00.
And I hope that my holding period for this stock is...... forever.
.
[updated 3/11/2008]: Months after holding AirAsia, I had found several accounting pitfalls in the statements of AirAsia. In short, AirAsia's performance is not as good as I thought before (i.e. when I wrote this post). For more details, pls refer to my other posts tagged "airasia".
8 comments:
Simple business model
This company involve only one core business - low cost airline.
It sell some other product like travel insurances. All these products are related and is still in the same industry. this make the company business simple and easy to understand.
its business concept is one that i can understand: provides no-frills air-travel service to public with extremely low fares. When the fares are low, more people are likely to take a flight, hence increase the load factor of aircrafts. When the load factors are high, profits come along. (the break evern load factor of AirAsia is around 55%, all the seats sold above 55% are the profit)
2. Growing business
LCC business is new in Asia region and it is a growing industry. LCC's grap more and more market share in the airline services.
from two aircraft in 2002, AirAsia now has over 50 aircrafts. According to its confirmed order with Airbus, AirAsia's fleet size is going to 3-folded (maybe 4-folded) in the next five years. We may assume that its revenue and profit may experience a similar growth rate.
Due to the increasing market demands, AirAsia's management is probably going to increase its order on Airbus.
in fact, i believe that AirAsia's profit may growth with a higher rate than its fleet size. this is because the old Boeings are being replace by brand new Airbus, and the average distance of AirAsia's route is increasing. And it will be more cost-effective when its sales volume increase. All these means its profit margin may improve in the coming years.
3. Great management – Tony Fernandes
His record is brilliant.
In 1991, at age of 27, he became the youngest-ever managing director of Warner Music (Malaysia) Sdn Bhd. He subsequently became the South East Asian regional vice-president for Warner Music Group from 1992-2001.
When he bought AirAsia from DRB-Hicom on the end of 2001, AirAsia was a company that had been losing money for years, and heavily indebted (40million, RM). One year after Tony’s take over, Airasia had broken even, and cleared all its debt. From 2 ageing Boeing jets in 2001, AirAsia fleet size grow dramatically to >50 within five years.
As his company, Tony is still young and energetic. I believe that AirAsia will continue to grow under his supervision.
4. High profitability
AirAis has a high profit margin compared to the other LCCs. In fact, the flying cost of AirAsia (US cents 2.7 per ASK) is the lowest among the LCCs worldwide.
The high profitability is quite important, because more and more LCC companies are being launched in recent years. Its low-cost and high profit margin will make it able to survive in the competitions between LCC's.
5. Leader in its industry
(If you think the prospect of an industry is great, invest in a company which is the top leader in that industry)
As I said, in term of passengers carried, AirAsia now has a highest share in domestic market.
We can say that the Malaysians that flew with AirAsia is more than any other airlines. AirAsia has become the choice of most Malaysians. So, at least in my opinion, AirAsia is a leader in Malaysia's aviation industry.
In the latest released World Airline Awards (a worldwide- recognised, independent passanger survey of airline standard), AirAsia has become the Best Low-cost Airline in Asia region.
6. Strong Brand Name
in just 5 years, AirAsia has become one of the most well-known brands in our country. Almost every Malaysian that has flown during past few years heard about AirAsia, and I'm sure most of them love it, even thought some of them love AirAsia just because of its low fare.
(quite a numbers of my friends like to complaint about the poor sevices of AirAsia. But guess what? they still buy AirAsia tickets. Why? because MAS is just too expensive for people like us. so... while making lots of complains, they have to fly AirAsia too, we have no choice, hahaha.....)
At least, AirAsia is undoubtly well-known with its looooowwwwww price! Even those who never fly also heard about the name AirAsia. You hardly found a local brand that's as famous as AirAsia in South East Aisa region.
(other brands like Maxis, Astro,... are not quite establish outside Malaysia)
I think the Oil-price will affect the profitablity. What do you think, value investor?
Hi, Nazri.
in my opinion, high oil price will have a huge impact on most airlines.
There could be two different destination for airlines. Those that are not well managed may go bankruptcy, thus being thrown out from the market, e.g. Oasis, AdamAir. But those that are well managed, e.g. Ryanair and Southwest, will benefit from it because they will have less competitors then.
I think AirAsia is the later.
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